SFB 303 Discussion Paper No. A-570

Author: Corneo, G. and M. Marquardt
Title: Employers' Versus Employees' Contributions To The Social Security System
Abstract: We develop an overlapping-generations model that highlights the interaction between an unfunded pension system and an unemployment insurance in the presence of a labor market with union wage setting. The social security system is financed by proportional wage taxes levied on firms and their employees. The equilibrium path entails endogenous growth and involuntary unemployment. The contribution rates to the social security system are shown to have no influence on the equilibrium rate of unemployment. The contribution rates exert growth effects, which are negative for the contributions to the pension system and positive for those to the unemployment insurance. We investigate whether workers or firms should finance the social security system. While there is no financing method that dominates another one on efficiency grounds, the financing methods can be ranked with respect to their growth effects. Maximizing economic growth requires that only firms finance the unemployment insurance and only workers finance the pension system. These results are due to the interaction between the pension system and the unemployment insurance, and would not arise if only one of these institutions were present.
Keywords: Public Pensions, Unemployment Insurance, Equilibrium Unemployment, Endogenous Growth
JEL-Classification-Number: E24, H55, J51
Creation-Date: January 1998
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